What Is a Term Loan?
A term loan is debt that is drawn in full at closing and repaid according to a set schedule over a defined term, unlike a revolver that can be borrowed and repaid repeatedly. Corporate term loans are usually senior secured, carry floating interest rates quoted as a benchmark plus a spread, and mature in five to seven years.
In leveraged finance, term loans come in flavors. Term Loan A facilities are held mostly by banks and amortize meaningfully each year, while Term Loan B facilities are sold to institutional investors like CLOs and loan funds, amortize only nominally, and repay mostly through a large balloon payment at maturity.
How It Works
The borrower receives the full principal at closing and pays interest on the outstanding balance, typically a floating benchmark rate plus a spread of a few hundred basis points depending on credit quality. Scheduled amortization reduces principal over time, and many agreements add mandatory prepayments from excess cash flow or asset sale proceeds.
A common Term Loan B structure amortizes at just 1 percent of principal per year, leaving the bulk due at maturity. Term loans are usually prepayable at par, which gives borrowers flexibility to refinance when credit markets improve, sometimes subject to a short soft-call period.
Example
Suppose a private equity firm finances a buyout with a 500 million dollar Term Loan B priced at a 4 percent benchmark rate plus a 3.5 percent spread, or 7.5 percent all-in. Annual interest starts at about 37.5 million dollars, and required amortization of 1 percent means just 5 million dollars of principal is repaid each year.
After seven years of scheduled payments, roughly 465 million dollars would still be outstanding at maturity, which the company expects to refinance or repay from a sale of the business. This is why leveraged borrowers care so much about keeping access to capital markets open.
Why It Matters
Term loans are the backbone of the roughly trillion-dollar leveraged loan market and the primary funding source for LBOs. Their floating rates mean borrower interest costs rise and fall with central bank policy, which directly affects credit risk across the market.
Analysts in leveraged finance, private credit, and restructuring spend much of their time modeling term loan amortization, pricing, and covenant packages, so fluency with these mechanics is a core job skill.
